Saturday, October 11, 2008
There's a piece of the mortgage crisis that everyone seems to be overlooking or discounting.
Real estate prices (I refuse to say values) shot way up over the past few years. The reason was the ease of obtaining credit. It used to be that you could obtain a mortgage commensurate with your ability to pay. If you had a certain income, the banks would tell you that you could afford, say, a $150,000 house, and that was that. When you went shopping, you looked at $150,000 houses. If you were selling a house, you had to be careful not to overprice it, so you wouldn't price yourself out of the market.
And then suddenly, mortgages got easier to qualify for. On the same salary as above, you could get a $200K, or $500K mortgage. So that's the size house you looked for.
Most people really don't have a realistic idea of what they can afford. They don't plan for a crisis. And real estate prices were going up, so they figured that if it turned out that they couldn't afford it, well, they'd just sell it and walk away with a profit. Nobody ever loses money on a house, right?
Well, with looser money, the folks who sell houses realized they may as well get some of that, too. So the prices on houses rose. The same folks who used to buy a $150K house are now shopping for a $250K house, so the house that used to sell for $150K is now priced at $250K. A market-driven inflation. (Not so suddenly, of course, but the movement was inevitable and inexorable, but not inexplicable. It should have been expected.)
In some areas of the country now, it's not unusual to find a four room "fixer-upper" on 1/6 acre in a bad neighborhood listed at $300K. This is patently ridiculous. It's a "deal" only because everything else around it is priced higher.
Home prices were rising faster than salaries. Defaults were rife. Now there are "bank owned" properties on the market, selling for less than average, so it's bringing averages down. It could be a good deal for buyers, except that if they have to sell one house to buy another, they can't.
I see another problem brewing.
Lenders are going to get tougher. You're going to have to really qualify for that mortgage. The banks, having been burned, are now going to tell you that you qualify for only $150K again. But anyplace you'd want to live is priced higher than that, so the real estate market is going to drop. The original $150K house will eventually drop to $150K, because the trough is empty.
This will be good news for buyers.
This will be very bad news for homeowners and sellers.
If you had bought a home with a mortgage in the past five years, you're going to find your house is worth less on the market than you owe on it. Your equity is negative. You won't be able to refinance it, and you'll take a loss on selling it. And if you've been conscientiously making the payments, the government is unlikely to help you.
You are screwed.
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3 comments:
Because of my "good credit", I was able to get an "undocumented" mortgage and could have gotten any amount I wanted. Good thing my hubby and I are smart and only borrowed as much as we knew we could afford to pay.
Now, I see on my most recent tax bill that the "full market value" of my house is "assessed" at well over $64K more than it appraised for when we bought it. But I know we couldn't sell it for that. Good thing we don't want to sell any time soon anyway... Whew!
Well stated. I can't believe people didn't realize this 3 years ago. When the house next to us was appraised and sold at $225k, I smelled a rat in the system.
When I bought my house nine years ago, the mortgage company (a staid and well-respected one) told me I could afford a mortgage three times more than what I make.
I knew that was ridiculous. I decided on the price I was willing to pay and I am so glad I kept to it, because otherwise The Lost Years would have been The Homeless Years.
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